World’s super rich pull back from hedge funds

Trend among hedge funds' traditional client base mirrors one seen in the institutional market

By

Tabby Kinder

September 12, 2017 Updated: 11:24 a.m. GMT

The world's super rich are continuing to pull money from hedge funds amid concerns over high costs and poor performance — but appetite for other alternative assets is growing.

This trend among hedge funds' traditional client base mirrors one seen in the institutional market and will put extra pressure on managers that have struggled in recent years to fulfill the promise of high returns for high fees.

Family offices – private firms that run investments for affluent families or individuals – that have been invested in hedge funds for a number of years reported a 1% drop in these allocations in 2016, according to the latest Global Family Office Report from UBS.

This marked the second consecutive year of decline and around a third of the 262 family offices surveyed said they planned to decrease their allocations to hedge funds further.

Sara Ferrari, UBS' head of family office, said: "Despite improved returns compared with 2015, hedge fund performance continued to disappoint last year.

"While the liquidity offered by hedge funds remains attractive to some family offices, the majority are investing with a long-term perspective. Many family offices remain open to the asset class, but they are increasingly probing in selecting their managers, looking for those demonstrating a distinctive offer and strategy that clearly addresses the market and economic backdrop."

Hedge funds attracted 6.2% of family office assets on average last year, with low allocations of around 2% from Asia Pacific and emerging markets offsetting those from Europe and North America.

Family offices put more money to work with private equity and venture capital funds, with the asset class accounting for around a fifth of portfolios on average. That put the asset class behind only equities, which accounted for 27% allocations, as the most popular among family offices last year.

Investments in real estate, meanwhile, accounted for 16% of family office portfolios on average, making it the third-largest asset class.

Willis Towers Watson — which advises some of the world's biggest pension funds and insurers on how to allocate their money — noted that managers were looking more to property and illiquid credit than hedge funds in their hunt for returns.

Luba Nikulina, global head of manager research at Willis Towers Watson, said at the time: "There has been negative sentiment on hedge funds for a while, thanks to high fees and perceived poor alignment of interests with investors. In the last year, it has finally started showing in the asset allocation decisions."